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Intel Corporation announced second-quarter financial results. As always, Intel is profitable and beating expectations.

The company’s revenue achieved $6.8 billion, up 1% sequentially and up 8% year-over-year. Second-quarter net income was $896 million, down 2% sequentially and up 101% year-over-year. Earnings per share were $0.14, flat sequentially and up 100% from $0.07 in the second quarter of 2002. Last year’s second-quarter results included a $106 million charge to cost of sales related to winding down the online services business, along with a $112 million write-off of acquired intangibles.

Information Regarding Future Plans and Expectations:

  • Intel expects to ship 2 million of Pentium M
  • The company anticipates that 50% of its performance desktop processors will be enabled with the HT technology by the end of the fourth quarter.
  • Intel is currently shipping samples of code-named Dothan and Prescott processors to certain customers and expects revenue shipments to start in Q4 2003.
  • 90nm ramp and yields are in-line with expectations.

Second Quarter Highlights:

Financial Review:

  • Gains or losses on equity investments and interest and other resulted in a net loss of $5 million, lower than the expectation of a net loss of $20 million. The net loss on equity investments was $58 million, including the impact of impairment charges of approximately $64 million.
  • The tax rate was 29.5 percent in the second quarter, lower than the company's expectation of 30.5 percent, due to a tax benefit related to a divestiture of a prior acquisition that closed during the quarter.

Key Product Trends (Sequential):

  • Intel Architecture microprocessor units and average selling prices were approximately flat.
  • Chipset units were approximately flat.
  • Mainboard units were higher.
  • Flash memory units were sequentially lower.
  • Ethernet connectivity product units were slightly higher.
  • Mobile shipments have grown twice the rate of desktops.
  • In the second quarter Intel surpassed its goal of shipping 1 million of Pentium M processors, majority of the number was shipped as a part of Centrino platform.
  • Intel CPU and chipsets sales in Asia-Pacific set the record and were not affected by SARS. Even though they noted that flash memory sales decreased in APAC.
  • Intel’s 865-series and 875P are on track to be Intel’s fastest ramping chipsets in history.
  • In Q2 Intel shipped 2 million of Pentium 4 CPUs with the Hyper-Threading technology.

Intel Communications Group:

  • In wireless networking, Intel announced plans to develop silicon products based on the 802.16a standard, a new technology that provides a wireless broadband alternative to cable and DSL. Networks based on the 802.16a standard are expected to transfer data over a range of up to 30 miles and, depending on the distance, at speeds up to 70Mb/s.
  • In network processing, the company announced support for Advanced Switching, a standards-based extension of the PCI Express technology designed for the computing industry. In addition, Avici, Samsung and U.S. Robotics introduced new products based on Intel network processors during the quarter.
  • Intel advanced its optical strategy with the July acquisition of West Bay Semiconductor of Vancouver, which designs chips for transporting voice and data over SONET/SDH-based optical networks. Intel plans to combine the technology with its 90nm manufacturing process to reduce the cost, power and complexity of optical networking equipment.

Technology and Manufacturing Group:

  • Intel opened its newest development fab, D1D, in Hillsboro, Oregon. The $2 billion, 300mm facility will initially develop Intel’s 65nm process technology, which will be used to manufacture Intel’s highest performance processors in the 2005 timeframe.
  • The company revealed improvements on its advanced “tri-gate” transistor design and said the technology is moving from research to the development phase. The design of this novel three-dimensional (3D) transistor will allow the company to continue to drive Moore’s Law and deliver higher performance, lower power processors in the future.

Business Outlook for Q3:

  • Continuing uncertainty in global economic conditions makes it particularly difficult to predict product demand and other related matters.
  • Revenue in the third quarter is expected to be between $6.9 billion and $7.5 billion.
  • Gross margin percentage in the third quarter is expected to be approximately 54%, plus or minus a couple of points, higher than 50.9% in the second quarter primarily due to higher expected revenue, lower start-up costs and lower unit costs. Intel’s gross margin percentage varies primarily with revenue levels, product mix and pricing, changes in unit costs and inventory valuation, capacity utilization, and the timing of factory ramps and associated costs.
  • Gross margin percentage for 2003 is expected to be approximately 54%, plus or minus a few points, higher than the previous expectation of 51%, plus or minus a few points. The increase is primarily due to higher expected revenue along with lower start-up costs as resources are transferred to next-generation process development.
  • R&D spending for 2003 is expected to be approximately $4.2 billion, higher than the previous expectation of $4.0 billion, primarily due to the transfer of resources from 90nm start-up activities to 65nm process development.
  • Expenses (R&D plus MG&A) in the third quarter are expected to be approximately $2.2 billion. Expenses, particularly certain marketing- and compensation-related expenses, vary depending on the level of revenue and profits.
  • The capital spending expectation for 2003 is unchanged at $3.5 billion to $3.9 billion.
  • Gains or losses from equity investments and interest and other in the third quarter is expected to be a net loss of $25 million due to the expectation of a net loss on equity investments of approximately $60 million, primarily as a result of impairment charges on private equity investments.
  • The tax rate is expected to be approximately 24 % for the third quarter and 30.5 % for the fourth quarter. The lower rate for the third quarter as compared to the second and fourth quarters is due to an expected tax benefit related to a divestiture that is anticipated to close shortly. This divestiture is not expected to have a material impact on income before taxes. The tax rate may be affected by many factors including changes in law, the closing of acquisitions or divestitures, the jurisdictions in which products are manufactured and sold and profits are determined to be earned and taxed, and the ability to realize deferred tax assets.
  • Depreciation is expected to be approximately $1.2 billion for the third quarter and $4.7 billion for the year, slightly lower than the previous expectation of $4.8 billion for the year.
  • Amortization of acquisition-related intangibles and costs is expected to be approximately $70 million in the third quarter and approximately $300 million for the year.


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